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Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks
This paper studies the non-linear response of the term structure of interest rates to monetary policy shocks. We show that uncertainty about monetary policy changes the way the term structure responds to monetary policy. A policy tightening leads to a significantly smaller increase in long-term b...
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| Published in: | MAGKS - Joint Discussion Paper Series in Economics (Band 24-2017) |
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| Main Author: | |
| Format: | Article |
| Language: | English |
| Published: |
Philipps-Universität Marburg
2017
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| Subjects: | |
| Online Access: | PDF Full Text |
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| Summary: | This paper studies the non-linear response of the term structure of interest
rates to monetary policy shocks. We show that uncertainty about monetary
policy changes the way the term structure responds to monetary policy. A
policy tightening leads to a significantly smaller increase in long-term bond
yields if policy uncertainty is high at the time of the shock. We also look at
the decomposition of bond yields into expectations about policy and the term
premium. The weaker response of yields is driven by the fall in term premia,
which fall even more if uncertainty about policy is high. These �ndings are
robust to the measurement of monetary policy uncertainty and the definition
of the monetary policy shock. We argue that short-term uncertainty about
monetary policy tends to make yields of longer maturities relatively more
attractive. As a consequence, investors demand lower term premia. This
intuition is supported by the fact that long-term monetary policy uncertainty
leads to opposite effects with term premia increasing even more after a policy
shock. |
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| Physical Description: | 42 Pages |
| ISSN: | 1867-3678 |
| DOI: | 10.17192/es2024.0545 |